Wednesday, July 02, 2014

The Coming Hops Crisis?

Rapid growth of the American craft brewing industry presents a challenge unlike any the American hop
industry has
previously faced.
The State o
f the
U.S.
Hop Industry and
of
the hop market
is
stable. However, that stability will not be long lived.
The industry is
moving
perilously toward a wall of production
capacity.
The craft industry expanded at 15% in 2012.
If
growth in
the
U.S.
craft brewing industry continues between
10
–
15
% per year
in 20
13, and if
the varieties in demand
do
not change
to
include those from other
countries or those
harvested earlier or later,
fierce
competition for limited production and higher prices
are inevitable. This does not take into consideration the return of the
multinational
mega
-
brewers
en masse into the alpha market,
something we anticipate will
also
happen
within
the next 2
-
3 years. Since 2008, they have been
using up inventory purchased in 08
while buying at reduced volumes.
When they reenter the market, their needs
will
compete
for
scarce acreage
and capacity.

47 Hops estimates the US industry as a whole needs to invest between
$500 million and $1 billion in the next 5 years if craft beer growth
stays somewhere between 10-20% per year. Banks want their money back in
roughly 5 years +/- a year or two. Current prices are simply not high
enough to pay for the continued growth of the industry. To reach that
level of return plus a reasonable 15-20% return on investment for the
grower, prices will need to roughly double from where they are today. [My bold]

If you want to spend some time reading through the material, there's a lot more there--both hard data and some extrapolation. (47 Hops is a hop dealer and they seem inevitably to come to a conclusion that supports their business model--get a contract now!--but I don't know that it makes the analysis wrong.) Something to put in the back of your mind.

3 comments:

I'd like to here what Beeronomics blog has to say about this. It seems like intentionally shorting the market in order to drive higher prices is the bigger issue here. It's not like damand curves have flattened or weakend in the last decade.

Dan … The idea of somebody intentionally shorting the market sounds nice on the surface, but in reality it's simply not possible. You're giving the hop industry too much credit. True, it's a small industry, but it's not so well organized. Everybody acts either independently or together in small groups with like-minded colleagues (and even then they don't trust each other and act independently). They never agree on anything unanimously. Look at their track record with Federal Marketing Orders in the US if you'd like some proof. The increasing price is really just good old-fashioned supply and demand at work with all its plusses and minuses … real invisible hand type stuff … a-la Adam Smith. I like your conspiratorial nature though!